This now serves as a blog to collect some of the comments I make on other blogs related to management improvement (Deming, lean thinking, six sigma, leadership, systems thinking, respect for people...).

Tuesday, January 18, 2005

Price Discrimination in the Internet Age

There is a simple method for large multi-national companies to use to protect against currency fluctuation. They can use foreign exchange futures to do so. Companies do this all the time (some also chose not to for their own business reasons). "Foreign Exchange is the largest of the global financial markets. Daily trading volume in the currency markets is estimated to be 1.1 US trillion dollars." - Smith Barney Citigroup. Some companies choose to speculate on the direction they believe exchange rates will go (either directly, or by not hedging when they believe rates will move in their favor and hedging when they predict doing so will benefit them). In fact the United States government gives beneficial tax treatment (60% of profits are classified as long term capital gains, regardless of the holding period, thus reducing the taxes owed) to profits from "futures" trading. The reasoning is that creating a market for companies to hedge their risks is so important we must provide tax benefits to create a market for this activity. Some may think that the special tax advantages are more likely due to large payments from lobbyists to those who write the tax code than the merits of such tax law. In fact I may be one of them. Farmers often use futures contracts (on, for example, wheat or corn) in much the same way that companies can use future currency contracts to hedge their risks. That point is mentioned by the lobbyists, I would imagine.

The argument that you need to cripple products by geographic area to cope with currency fluctuations is false. It might be that a company wants to practice Price Discrimination (definition from US Federal Trade Commission or from the Digital Economist) to charge more where they can get more and less where they can get less. In the view of such a company, the internet, and other factors, have made it increasingly easy for people to buy in the low cost region and resell the items in the region where the company wants to charge higher prices. If you want to keep practicing price descrimination as a company you have to erect barriers to the free trade of your products by your customers.

Reimporting drugs is another clear example where companies try to use price discrimination - to charge US consumers more than Canadian consumers. Drug companies have successfully created legal road blocks to those trying to get around the geographic price discrimination. However, since lately those responsible for enforcing those laws have not been very eager to do so you can imagine the drug companies would like a drug that only worked in the country it was purchased. Another example of price discrimination are the regional versions of Windows.

I happen to believe companies should have the right to practice price discrimination. And in fact they should have the right to make products that have replacement parts that have been crippled to work only in products sold in specific countries. I would rather deal with companies that were trying to provide me more value not less. So I would be reluctant to buy from companies that practice such anti-consumer behavior. And luckily the internet and blogs are making it very difficult for companies to hind such practices. My guess is once attention is focused on such practices some companies will take advantage of such behavior by pledging "to do no evil." And those companies will gain customers. The process will be quite a bit more confusing in the real world but that is how things will play out in the long run.